Module 6 - IAS 2 Inventory Slides

IAS 2: INVENTORY
DURING THE LECTURE:

− Arrive prepared!
− Participate in classroom discussions.
− Ask questions.
AFTER THE LECTURE:

− Study the relevant chapter in your prescribed textbook.
− Understand the new concepts that are explained in the
textbook.
− Keep up and REVIEW AS YOU GO.
− Do questions in question bank.
− CONSULT! CONSULT! CONSULT!
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→ Know and apply the definitions relevant to
inventory
→ Understand the underlying assumption of the
accrual basis as it applies to inventory.
→ Understand what is meant by the term “inventory”
and why inventory is recognised as a current
asset at the reporting date.
→ Record inventory transactions by using the
perpetual or periodic recording method.
→ Calculate the cost of inventory.
→ Calculate the cost of interchangeable inventory

items using either the FIFO or WA costing
formula.
→ Understand that inventory should be recognised
at the lower of cost or NRV
→ Calculate the NRV for inventory on hand at the
reporting date, and record any adjustments
required to the carrying amount of inventory.
→ Draft an appropriate accounting policy note for
inventory in the financial statements of an entity
to meet the disclosure requirements of IAS2,
Inventories.
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Overview of the topic
• Definition of inventory
• Recording of inventory
• Measurement of inventory
• At initial recognition
• Subsequently
• Disclosure of inventory
Definition
Inventory are ASSETS (both tangible and
intangible), that:
• Are held for sale in the ordinary course of
business; or
• Are in the process of production for such sale; or
• Are consumed during the production of saleable
goods or services.
Whether a certain item is classified as inventory

depends solely on its purpose to the entity.
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Classification of an asset as inventory
Asset: Motor vehicle
Owner: Car dealership
The vehicle is used as a shuttle

for clients having their vehicles
serviced at the dealership
Purpose/intention:
The vehicle stands on the
dealership floor for sale to the public
Classification of an asset as inventory

Asset: Building - Warehouse
Owner: Construction company
Storage of building materials used by the

company
Purpose/intention: The building is leased to a 3rd party
The construction company is in the business

of building warehouses and the warehouse
is one of many build in an industrial park and
available for sale to the public
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Scope of IAS 2
Exclude:
- Financial instruments
- Biological assets
Partially exclude:
- Mineral and mineral products
- Commodity brokers
- Producers of agricultural and forest products
Recording of inventory
Either the PERIODIC RECORDING method or the

PERPETUAL RECORDING method must be
applied when recording the purchase of inventory
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Measurement
Measurement has to do with the AMOUNT at

which an item is recognised in the financial
records.
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Measurement of Inventory (Initial)
Inventory is measured at cost.
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Measurement of Inventory
The historical cost of inventories includes:
→ Purchasing cost
→ Conversion cost (New!)
→ Other costs incurred in bringing inventories to their present
location and condition.
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Cost of purchase
→ The cost of inventory would include all costs directly associated
with the acquisition, such as:
o Purchase price
o Transport cost (inwards)
o Import duties and transaction taxes that are not reclaimable
by the business
o Other direct costs
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Cost of purchase
→ The following costs would be excluded from the cost of
inventory:
o Transport costs (outwards)
o Import duties and transaction taxes that are reclaimable by
the business
o Financing costs due to extended payment terms
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Cost of purchase
→ The following would be set-off against the cost of the inventory
o Rebates received
o Trade, bulk and cash discounts received
o Settlement discounts received or expected to be received
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EXAMPLE 1
→ Reneben Ltd purchased 10 office desks for resale. The supplier
agreed to supply the desks at R230 per desk.
→ The supplier grants a 10% early settlement discount provided
that the invoice is settled within 30 days.
→ Reneben Ltd has contracted a furniture removal company to
collect the furniture from the supplier in Durban and deliver it to
the showroom in Gauteng. The removal company charged the
entity a non-refundable R460 for delivery of the 10 desks.
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EXAMPLE 1...continued
→ A goods-in-transit insurance was taken out with the entity’s
insurance brokers covering any damage to the desks while in
transit, limited to the value of the original invoice price paid. The
premium in respect of this insurance was R115.
→ On route to Gauteng, an attempt was made to hijack the delivery
truck and one of the desks was irreparably damaged. A claim
was submitted to the insurance company.
→ The entity is a registered VAT vendor and so are all the
suppliers it deals with.
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EXAMPLE 1...continued
→ The entity has a policy of claiming all discounts available to it.
REQUIRED:
Calculate the cost of the inventories purchased
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EXAMPLE 1_SOLUTION
R
Purchase price (Excl VAT) (2 300 x 100 ÷ 115) x 10 2 000
Less: Settlement discount 2 000 x 10% (200)
1 800
Plus: Transport cost (Excl VAT) 460 x 100 ÷ 115 400
Plus: Insurance cost (Excl VAT) 115 x 100 ÷ 115 100
Less: Goods written off 1 800 ÷ 10 (180)
2 120
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EXAMPLE 2
→ Inventories-R-Us Ltd purchased inventory on extended credit
terms on 1 January 2018 from one of its suppliers.
→ The entity has to pay the supplier R6 325 for the inventory on
31 December 2018.
→ A market related interest rate for a similar transaction is 10% per
annum.
REQUIRED:
Calculate the cost of sales for the period ending 31 December
2018.
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EXAMPLE 2_SOLUTION
PV = 5 750
FV = 6 325
n = 1
i = 10%
The cost of the goods purchased is R5 750, and the difference of
R575 (R6 325 – R5 750) will be accounted for as finance charges in
profit or loss.
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Cost of conversion (IAS 2, par 13)
→ Direct cost relating to the units of production
→ Indirect cost
o indirect fixed production overheads (allocated on normal
capacity but limited to actual costs incurred); and
o indirect variable production overheads (allocated on actual
use)
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→ Direct cost relating to the units of production
o Are those costs that can be allocated directly to the
production process and are directly attributable to each unit
or group of units produced.
o Examples of direct costs are direct labour and materials
used.
o Direct costs incurred vary in direct relation to the number of
units produced and are therefore all variable costs.
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→ Indirect cost
o Indirect costs are sometimes also referred to as ‘production
overheads’, which are costs that cannot be allocated to the
production of a specific unit, but rather to the production
process in general.
o For example, a factory’s water and electricity costs are
indirect costs.
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→ Indirect cost
o Variable production overheads are those costs that vary
depending on the number of units produced.
o There is a direct correlation between the number of units
produced and the variable cost incurred.
o Variable costs vary directly with the volume of production
and are allocated to each unit of production based on the
actual number of units produced for the period.
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→ Indirect cost
o Examples of variable production overheads are:
» The cost of water and electricity may increase when
more units are produced, even though it will not increase
in direct relation to the increased production.
» If the factory increases production, the use of indirect
labour may also increase (for example, if more packers
are needed).
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→ Indirect cost
o Fixed production overheads are indirect costs that do not
vary depending on the number of units produced.
o Fixed costs stay constant, irrespective of the level of
production.
o An example of fixed production overheads is the cost of
depreciation and the maintenance of factory buildings,
which generally remains fairly constant irrespective of the
volume of production.
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EXAMPLE 3
→ Cleron Ltd manufactures product Topaz for resale.
→ Purchases of raw materials are made at the start of every week
and amount to 800 tons per week (which equals normal
capacity). Purchasing costs per ton of raw materials is R75.
→ In addition to this customs duties of R5 per ton and carriage of
R10 per ton are incurred to transport the materials to the factory.
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EXAMPLE 3 …continued
→ Further information in respect of topaz for the year ended 31
December 2011:
o Variable production overheads: R25 per ton
o Fixed production overheads: R16 000 per week
→ One ton of raw material produces one ton of finished goods.
→ Closing inventories of finished goods on hand at 31 December
2011 amounted to 200 tons.
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→ Inventories are measured in accordance with the FIFO method.
→ Product Topaz is sold for R200 per ton.
→ The entity was incorporated at the beginning of the current
financial period and was operational for 50 weeks during the
year.
→ No raw materials were on hand at the beginning of the financial
period.
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→ REQUIRED:
a) Calculate the value of closing inventory at 31 Dec 2011.
b) Calculate the cost of sales for the year ending 31 Dec 2011.
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EXAMPLE 3_SOLUTION
Cost of inventories: R
Purchase price 75
Plus: Customs duties 5
Plus: Carriage 10
Plus: Variable production overheads 25
Plus: Fixed production overheads 16 000 ÷ 800 20
135
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EXAMPLE 3_SOLUTION
Cost of inventories: R
Purchase price 75
Plus: Customs duties 5
Plus: Carriage 10
Plus: Variable production overheads 25
Plus: Fixed production overheads 16 000 ÷ 800 20
135
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EXAMPLE 3_SOLUTION
Closing inventories: 200 tons x R135 per ton = R27 000
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EXAMPLE 3_SOLUTION
No of units sold during 2011 Units
Opening balance inventory 0
Plus: Purchased during 2011 50 x 800 40 000
Less: Closing inventory 200
39 800
Cost of unit sold during 2011 R

Cost of sales 39 800 x 135 5 373 000
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EXAMPLE 3_SOLUTION
No of units sold during 2011 Units
Opening balance inventory 0
Plus: Purchased during 2011 50 x 800 40 000
Less: Closing inventory 200
39 800
Cost of unit sold during 2011 R

Cost of sales 39 800 x 135 5 373 000
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EXAMPLE 4
→ The normal capacity of an entity is 50 000 units per annum.
→ The raw material cost per unit is R50.
→ Direct labour cost amount to R25 per unit.
→ Variable production overheads are R15 per unit.
→ Fixed production overheads incurred amount to R980 000.
→ The closing balance of finished goods is 15 000 units.
→ Assume that there is no opening balance.
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EXAMPLE 4 … continued
→ REQUIRED:
Calculate the cost of sales in the statement of profit or loss and
other comprehensive income if actual production of the
company is:
a) 70 000 units per year (very high level of production)
b) 40 000 units per year
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EXAMPLE 4_SOLUTION
a) Calculate CoS when actual production is 70 000 units.
Cost of inventories per unit: R
Raw material 50
Direct labour 25
Variable production overheads 15
Fixed production overheads 980 000 / 70 000 14
Total cost per unit 104
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EXAMPLE 4_SOLUTION

Raw material 50
Direct labour 25
Variable production overheads 15
Fixed production overheads 980 000 / 70 000 14
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EXAMPLE 4_SOLUTION
Cost of inventories (finished products sold) R’000

Opening balance finished goods 0
Plus: Transferred from WIP 70 000 x 104 7 280
Less: Closing balance finished goods 15 000 x 104 (1 560)
5 720
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EXAMPLE 4_SOLUTION

Plus: Transferred from WIP 70 000 x 104 7 280
Less: Closing balance finished goods 15 000 x 104 (1 560)
5 720
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EXAMPLE 4_SOLUTION
Fixed production overheads R’000
Incurred 980
Allocated (980)
Under-/over-recovery -
Cost of sales R’000
Cost of sales (finished goods sold) 5 720
Fixed production overheads (under-/over-recovery) -
Cost of sales 5 720
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EXAMPLE 4_SOLUTION
Incurred 980
Allocated (980)
Under-/over-recovery -

Fixed production overheads (under-/over-recovery) -
Cost of sales 5 720
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EXAMPLE 4_SOLUTION
b) Calculate CoS when actual production is 40 000 units.
Raw material 50.00
Direct labour 25.00
Variable production overheads 15.00
Fixed production overheads 980 000 / 50 000 19.60
Total cost per unit 109.60
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EXAMPLE 4_SOLUTION

Raw material 50.00
Direct labour 25.00
Variable production overheads 15.00
Fixed production overheads 980 000 / 50 000 19.60
Total cost per unit 109.60
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EXAMPLE 4_SOLUTION

Plus: Transferred from WIP 40 000 x 109.6 4 384
Less: Closing balance finished goods 15 000 x 109.6 (1 644)
2 740
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EXAMPLE 4_SOLUTION

Plus: Transferred from WIP 40 000 x 109.6 4 384
Less: Closing balance finished goods 15 000 x 109.6 (1 644)
2 740
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EXAMPLE 4_SOLUTION
Incurred 980
Allocated 40 000 x 19.60 (784)
Under recovery 196
Fixed production overheads (under-/over-recovery) 196
Cost of sales 2 936
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EXAMPLE 4_SOLUTION
Incurred 980
Allocated 40 000 x 19.60 (784)
Under recovery 196
Fixed production overheads (under-/over-recovery) 196
Cost of sales 2 936
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→ Other costs (are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their
present location and condition)
o Cost to design a product
o Amortisation of development cost relating to a specific
product
o Decommissioning and restoration cost
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→ Other costs (are included in the cost of inventories only to the
extent that they are incurred in bringing the inventories to their
present location and condition)
o Packaging cost incurred to prepare the inventory for sale
o Borrowing cost incurred on inventory that is a qualifying
asset.
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→ Cost excluded from the cost of inventory
o Abnormal amounts of waste incurred in the production
process
o Impairment losses on machinery and equipment used in the
manufacturing process
o Cost to distribute and transport goods to customers.
o Selling expenses
o Advertisement cost
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→ Cost excluded from the cost of inventory
o General administrative overheads
o Storage costs (unless these cost are a necessary part of
getting inventory into a saleable condition)
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EXAMPLE 5
→ Bakker Ltd purchased wooden planks for R100.
→ An employee, who is paid an hourly wage of R20, normally
takes one hour to make a desk from the wood.
→ A particular employee, was however, engaged in a strike in an
attempt to secure higher wages, and took four hours to
manufacture a desk (he was therefore involved in the strike for
the equivalent of three hours).
→ In the manufacturing process, the employee uses 40 nails
costing a total of R5.
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→ REQUIRED:
Calculate the cost of sales for one desk.
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EXAMPLE 5_SOLUTION

Raw material (wooden plank) 100
Direct labour (normal capacity – 1 hour) 20
Direct materials (nails) 5
The additional R60 (R20 x 3 hours) wages paid to the employee
is abnormal, and is excluded from cost of inventories.
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EXAMPLE 5_SOLUTION
Raw material (wooden plank) 100
Direct labour (normal capacity – 1 hour) 20
Direct materials (nails) 5
The additional R60 (R20 x 3 hours) wages paid to the employee

is abnormal, and is excluded from cost of inventories.
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EXAMPLE 5_SOLUTION
Cost of sales R
Cost of inventories sold 125
Abnormal wastage expense R20 x 3 60
185
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EXAMPLE 5_SOLUTION
Cost of sales R
Cost of inventories sold 125
Abnormal wastage expense R20 x 3 60
185
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Measurement of Inventory (Subsequent)
Inventory is measured at the lower of cost

and net realisable value.
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How to calculate the amount of inventory that is presented on the

SFP:
Step 1: Calculate cost

Step 2: Calculate net realisable value
Step 3: Determine which one is the lowest (that is the amount
that appears on the SFP)
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Step 1:
Calculate the cost of inventory using the applicable cost formula.
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Cost formulas
FIFO WAM SI
(First in, first out) (Weighted Average Method) (Specific Identification Method)
FIFO values inventory with The word “weighted” refers

This method allocates costs
the assumption that the to the fact that the number
to separately identified
entity will sell the items of of items is taken into
items of inventory. It is
inventories in the order in account when calculating
particularly appropriate for
which they were purchased. cost. The WA is calculated
items acquired or
The “oldest” prices are either after each purchase
manufactured for a specific
debited first to CoS in P/L. or periodically. This
project and for items that
This method is appropriate method is appropriate to
are normally not
to interchangeable items of interchangeable items of
interchangeable.
large volumes. large volumes
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Other cost formulas/allocation techniques
This method involves working with expected costs, based on

normal levels of operations. Standard costs can be used for
convenience as long as the inventories values determined in
Standard cost this way approximate actual cost. A regular review, and
change where necessary, is required of the standard cost
where conditions change.
This method is particularly suitable for trading entities that do

not maintain complete records of purchases and inventories.
Inventories values are determined as the end of the reporting
Retail method period by determining the selling price of the inventories,
which is reduced by the average profit margin, to determine
the approximate cost of the trading inventories.
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Cost formulas
EXAMPLE 6
→ Inventory Ltd purchases 100 units of Product A for R16 each on
5 January 2019 and another 300 units of Product A for R16.50
on 30 January 2019.
→ Periodic stock counts revealed the following units of Product A
on hand at:
31 December 2018 0 units
31 January 2019 320 units
→ Inventory Ltd makes use of the FIFO method to value inventory
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Cost formulas
EXAMPLE 6 ...continued
REQUIRED:
Calculate the value of the inventory on hand at 31 December 2019.
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Cost formulas
EXAMPLE 6_SOLUTION
Value of inventory on hand using the FIFO method R

300 units @ R16.50 4 950
20 units (320 units – 300 units) @ R16 320
5 270
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Cost formulas
EXAMPLE 6_SOLUTION
Value of inventory on hand using the FIFO method R
300 units @ R16.50 4 950
5 270
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Cost formulas
EXAMPLE 7
→ Inventory Ltd purchases 100 units of Product A for R16 each on
5 January 2019 and another 300 units of Product A for R16.50
on 30 January 2019.
→ Periodic stock counts revealed the following units of Product A
on hand at:
31 December 2018 0 units
31 January 2019 320 units
→ Inventory Ltd makes use of the WA method to value inventory.
REQUIRED:
Calculate the value of the inventory on hand at 31 December 2019.
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Cost formulas
EXAMPLE 7_SOLUTION
Value of inventory on hand using WA method** R
Weighted average price R16.38 per unit

((100 x 16) + (300 x 16.50)) ÷ 400
Value of inventory on hand at 31 January 2019 5 240

(320 x 16.38)
** This is assuming that all sales took place after the goods were purchased.
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Cost formulas
EXAMPLE 7_SOLUTION
Value of inventory on hand using WA method** R
Weighted average price R16.38 per unit

((100 x 16) + (300 x 16.50)) ÷ 400
Value of inventory on hand at 31 January 2019 5 240

(320 x 16.38)
** This is assuming that all sales took place after the goods were purchased.
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Cost formulas
EXAMPLE 8
→ Inventory Ltd has incurred the following inventory transactions
during the month of February 2019:
Date Description of transaction Units Amount/unit
01/02 Opening balance 200 R20
02/02 Sales 120 R40
05/02 Purchases 300 R24
15/02 Sales 200 R48
25/02 Sales 150 R50
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Cost formulas
EXAMPLE 8 ...continued
REQUIRED:
Determine the cost of inventories using:
• FIFO method
• WA method
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Cost formulas
EXAMPLE 8_SOLUTION
02/02 Sales 120 R40
15/02 Sales 200 R48
25/02 Sales 150 R50
No of units on hand at 28/02/2019 = 180 units

(200 – 120 + 300 – 200 + 150 – 150)
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Cost formulas
EXAMPLE 8_SOLUTION: PART A – FIFO METHOD
02/02 Sales 120 R40
05/02 Purchases 2 300 R24
15/02 Sales 200 R48
25/02 Sales 150 R50
Value of 180 units of inventory on hand using the FIFO method R

150 units @ R30 4 500
5 220
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Cost formulas
EXAMPLE 8_SOLUTION: PART A – FIFO METHOD
02/02 Sales 120 R40
15/02 Sales 200 R48
25/02 Sales 150 R50
Value of 180 units of inventory on hand using the FIFO method R

150 units @ R30 4 500
5 220
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Cost formulas
EXAMPLE 8_SOLUTION: PART B – WA METHOD
Description
of Balance/ Amount/
Date transaction Units unit unit Calculation WA/unit
01/02 Opening R20.00
200 200 R20
balance
02/02 Sales 120 80
05/02 Purchases 300 380 R24 ((300 x 24) + (80 x 20))/380 R23.16
15/02 Sales 200 180
20/02 Purchases 150 330 R30 ((150 x 30) + (180 x 23.16))/330 R26.27
25/02 Sales 150 180
Value of inventory on hand at 28 February 2019 (180 units @ R26.27 per unit): R4 729
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Cost formulas
EXAMPLE 8_SOLUTION: PART B – WA METHOD
Description
of Balance/ Amount/
Date transaction Units unit unit Calculation WA/unit
01/02 Opening R20.00
200 200 R20
balance
02/02 Sales 120 80
05/02 Purchases 300 380 R24 ((300 x 24) + (80 x 20))/380 R23.16
15/02 Sales 200 180
20/02 Purchases 150 330 R30 ((150 x 30) + (180 x 23.16))/330 R26.27
25/02 Sales 150 180
Value of inventory on hand at 28 February 2019 (180 units @ R26.27 per unit): R4 729
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Step 2:
Net realisable Value (NRV) is the estimated selling price (ESP)

which could be realised in the normal course of business less the
estimated cost to be incurred in order to complete (CTC) the
product and to make the sale (CTS).
Formula for NRV = ESP – CTC – CTS
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Step 3:
Determine which one is the lowest and calculate any possible write
downs
Step 1: Determine the lowest amount between cost or net

realisable value.
Step 2: Adjust the value of inventory on the SFP if needed to
be reflected at the lowest amount.
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Net realisable value (NRV)
EXAMPLE 9
→ A company has inventory on hand at year end
(31 December 2018) that it expects to be able to sell in the
ordinary course of business for R100.
→ In order to sell this inventory, the company expects to incur
selling cost of R20 and expects to incur further costs of R30 to
put this inventory into a saleable condition.
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EXAMPLE 9 (…continued)
REQUIRED A:
Assuming that the cost of the inventory is R70
a) Calculate the NRV
b) Calculate any possible write-downs
c) Journalise any write-down necessary
d) Show where the write-down would be included and disclosed in
the financial statements.
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EXAMPLE 9_SOLUTION: REQUIRED A
a) Calculation: Net realisable value R

Estimated selling price 100
Less: Estimated cost of conversion/completion (30)
Less: Estimated cost to sell (20)
Net realizable value 50
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b) Calculate any possible write downs
Step 1: Determine the lowest amount between cost or net

realisable value.
Step 2: Adjust the value of inventory on the SFP if needed to
be reflected at the lowest amount.
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b) Calculation: Possible write down R

Original cost 70
Lower of cost or NRV (50)
Write down 20
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Original cost 70
Write down 20
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c) Journal Debit Credit

Cost of Sale: Inventory write down (P/L) 20
Inventory (SFP) 20
Write down of inventory to NRV
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90

Inventory (SFP) 20
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EXAMPLE 9 (…continued)
REQUIRED B:
Assuming that the cost of the inventory is R30
a) Calculate the NRV
b) Calculate any possible write-downs
c) Journalise any write-down necessary
d) Show where the write-down would be included and disclosed in
the financial statements.
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EXAMPLE 9_SOLUTION: REQUIRED B

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Original cost 30
Write down -
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Original cost 30
Write down -
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Inventory (SFP) 0
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EXAMPLE 10
A company has inventory on hand at year-end that was written
down in 2017 to a net realisable value of R50 (its original cost was
R70)
REQUIRED:
Prepare the journals for 2017 and 2018 assuming that the NRV of
this inventory at the end of 2018 is R75.
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EXAMPLE 10_SOLUTION
Journal Debit Credit
31 December 2017
Cost of Sale: Inventory write-down (P/L) 20
Inventory (SFP) 20
Write down of inventory to NRV [70 – 50 (decrease inventory)]
31 December 2018
Inventory (SFP) 20
Cost of sale: Reversal of inventory write-down (P/L) 20
Reversal of write down of inventory to NRV [75 – 50 (increase inventory)]
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EXAMPLE 10_SOLUTION
Journal Debit Credit
31 December 2017
Cost of Sale: Inventory write-down (P/L) 20
Inventory (SFP) 20
Write down of inventory to NRV [70 – 50 (decrease inventory)]
31 December 2018
Inventory (SFP) 20
Cost of sale: Reversal of inventory write-down (P/L) 20
Reversal of write down of inventory to NRV [75 – 50 (increase inventory)]
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Disclosure
Please refer to your course note for a

detailed illustrative example on the
disclosure requirements of IAS 2
Inventory.
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Disclosure
EXAMPLE 11
→ Inyati Ltd’s inventories consist of the following:
Opening Closing Net Realisable
Inventories Inventories Value
Raw material 35 000 15 000 14 500
WIP 15 000 25 500 20 000
Finished goods 40 000 20 500 30 000
Packaging material 1 750 1 600 1 450
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Disclosure
→ The following information for the year ended 31 Dec 2012 is
available:
2012
Revenue 275 000
Administrative expenses 75 000
Raw material purchases 90 000
Transport cost – raw materials 250
Variable production overhead cost 50 250
Fixed production overhead cost 41 500
Selling expenses 2 750
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Disclosure
→ Inyati Ltd measures raw materials and WIP according to the
FIFO method.
→ Finished goods and consumables are measured using the
weighted average method.
→ Fixed production overhead costs are allocated at R40 per unit.
→ The normal production capacity is 1 000 units.
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Disclosure
EXAMPLE 11_SOLUTION
Raw materials WIP Finished
goods
Opening inventories 35 000 15 000 40 000
Plus: Purchases/Transfers 90 000 110 250 190 000
Plus: Other costs 250 *90 250
Less: Transfers/sales (110 250) (190 000) (209 500)
Closing inventories 15 000 25 500 20 500
* 50 250 + (40 x 1 000)
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Disclosure
EXAMPLE 11_SOLUTION
Raw materials WIP Finished
goods
Opening inventories 35 000 15 000 40 000
Plus: Purchases/Transfers 90 000 110 250 190 000
Plus: Other costs 250 *90 250
Less: Transfers/sales (110 250) (190 000) (209 500)
Closing inventories 15 000 25 500 20 500
* 50 250 + (40 x 1 000)
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Disclosure
EXAMPLE 11_SOLUTION
Closing NRV Write-down
balance
Raw material 15 000 14 500 -
WIP 25 500 20 000 -
Finished goods 20 500 30 000 -
Packaging material 1 600 1 450 (150)
Raw materials, WIP and other supplies held for use in the production of
inventories are not written down below cost if the finished products in which
they will be incorporated are expected to be sold at or above cost.
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Disclosure
EXAMPLE 11_SOLUTION
Closing NRV Write-down
balance
Raw material 15 000 14 500 -
WIP 25 500 20 000 -
Finished goods 20 500 30 000 -
Packaging material 1 600 1 450 (150)
Raw materials, WIP and other supplies held for use in the production of
inventories are not written down below cost if the finished products in which
they will be incorporated are expected to be sold at or above cost.
54
108
Disclosure
EXAMPLE 11_SOLUTION
R
Cost of finished goods sold 209 500
Fixed production overheads under recovery *1 500
Consumables written off to NRV 150
211 150
* 41 500 – (40 x 1 000) = 1 500
109
Disclosure
EXAMPLE 11_SOLUTION
R
Cost of finished goods sold 209 500
Fixed production overheads under recovery *1 500
Consumables written off to NRV 150
211 150
* 41 500 – (40 x 1 000) = 1 500
55
110
Disclosure
EXAMPLE 11_SOLUTION
Inyati Ltd
Statement of financial position as at 31 December 2012
Note R
ASSETS
Current assets
Inventory 3 62 450
111
Disclosure
EXAMPLE 11_SOLUTION
Inyati Ltd
Statement of profit or loss and other comprehensive income
for the year ended 31 December 2012
R
Revenue 275 000
Cost of sales (211 150)
Gross profit 63 850
56
112
Disclosure
EXAMPLE 11_SOLUTION
Inyati Ltd
Notes for the year ended 31 December 2012
1. Accounting policy
1.1 Inventories
Inventories are measured at the lower of cost and net realizable
value using the following measurement methods:
Raw materials and work in progress: First-in, first out method
Finished goods and consumagles: Weighted average method
113
Disclosure
EXAMPLE 11_SOLUTION
Inyati Ltd
R
2. Profit before tax
Profit before tax includes the following item
Consumables written of to net realisable value (150)
57
114
Disclosure
EXAMPLE 11_SOLUTION
Inyati Ltd
R
3. Inventories
Raw materials 15 000
Work in progress 25 500
Finished goods 20 500
Consumables 1 450
62 450
115
58
116

Module 6 - IAS 2 Inventory Slides

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IAS 2: INVENTORY

DURING THE LECTURE:

AFTER THE LECTURE:

→ Calculate the cost of interchangeable inventory

Whether a certain item is classified as inventory

Owner: Car dealership

The vehicle is used as a shuttle

Classification of an asset as inventory

Owner: Construction company

Storage of building materials used by the

Purpose/intention: The building is leased to a 3rd party

The construction company is in the business

Either the PERIODIC RECORDING method or the

Measurement has to do with the AMOUNT at

Measurement of Inventory (Initial)

Inventory is measured at cost.

Closing inventories: 200 tons x R135 per ton = R27 000

Cost of unit sold during 2011 R

Cost of unit sold during 2011 R

Cost of inventories per unit: R

Cost of inventories (finished products sold) R’000

Cost of inventories (finished products sold) R’000

Cost of sales R’000

Cost of inventories per unit: R

Cost of inventories (finished products sold) R’000

Cost of inventories (finished products sold) R’000

Cost of inventories per unit: R

The additional R60 (R20 x 3 hours) wages paid to the employee

Measurement of Inventory (Subsequent)

Inventory is measured at the lower of cost

How to calculate the amount of inventory that is presented on the

Step 1: Calculate cost

Calculate the cost of inventory using the applicable cost formula.

FIFO values inventory with The word “weighted” refers

Other cost formulas/allocation techniques

This method involves working with expected costs, based on

This method is particularly suitable for trading entities that do

Value of inventory on hand using the FIFO method R

Weighted average price R16.38 per unit

Value of inventory on hand at 31 January 2019 5 240

Weighted average price R16.38 per unit

Value of inventory on hand at 31 January 2019 5 240

No of units on hand at 28/02/2019 = 180 units

Value of 180 units of inventory on hand using the FIFO method R

Value of 180 units of inventory on hand using the FIFO method R

Net realisable Value (NRV) is the estimated selling price (ESP)

Formula for NRV = ESP – CTC – CTS

Step 1: Determine the lowest amount between cost or net

Net realisable value (NRV)

a) Calculation: Net realisable value R

Net realisable value (NRV)

a) Calculation: Net realisable value R

b) Calculate any possible write downs

Step 1: Determine the lowest amount between cost or net

Net realisable value (NRV)

b) Calculation: Possible write down R

b) Calculation: Possible write down R

Net realisable value (NRV)

c) Journal Debit Credit

c) Journal Debit Credit

Net realisable value (NRV)

a) Calculation: Net realisable value R

Net realisable value (NRV)